ACCA Paper P2 (INT) Corporate Reporting Pocket notes

Specialised entities

Specialised entities Chapter 16

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the organisation needs to adopt to

achieve these goals.

• Performanceissometimesmeasured

in terms of efficiency, economy and

effectiveness – the Three Es.

Small and medium sized

entities

A small and medium sized entity (SME) is an

entity that:

(1) does not have public accountability and

(2) publishes general purpose financial

statements for external users.

Note that IFRS for SME does not have size-

based criteria as many countries, including

the UK, have law-based definitions of what

constitutes a small or medium-size entity for

the preparation and public filing of accounts.

It also avoids the problem of how to define

and apply monetary limits as many countries

have their own currency.

The problems of accounting for SMEs

• IFRSswerenotspecificallydesignedfor

large listed companies but their

application in many countries is by

large listed companies, which undertake

many complex transactions, in financial

instruments, for example. The main

users of financial statements prepared

under IFRS are the capital markets and

hence it is widely viewed that IFRSs are

designed for listed entities.

• AnySMEthatadoptsIFRSmustcomply

with all of the requirements of the

accounting standards. There are a

number of complex standards that are

not necessarily relevant to the users of

the SME’s financial statements.

Compliance with these brings a large

reporting burden on the entity.

Definition

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Specialised entities Chapter 16

• Themainusersofsmallcompany

financial statements are not normally

external investors, but the tax authorities,

lenders and potential lenders (often

banks) and the owner/managers

themselves. The recognition and

measurement criteria used by large

companies may not be appropriate and

may even be positively unhelpful to

owner/managers of small companies.

IFRS for SME

In July 2009, the IASB issued IFRS for SME

setting out the accounting treatment of small

and medium sized entities.

The aim of the IFRS is to provide a

simplified, stand-alone set of accounting

principles that are appropriate for smaller,

non-listed entities and are based on IFRS

GAAP as far as practicable.

It is left to individual countries to decide

whether or not to adopt IFRS for SME. so

that national differences in law etc can be

accommodated. It will also enable national

governments to restrict application of IFRS

for SME as they consider appropriate.

In comparison with IFRS GAAP, IFRS for

SME:

removes choices of accounting •

treatment; for example, the cost model

must be used for property, plant and

equipment and for investment properties.

eliminates topics that are not generally •

relevant to SME; for example,

requirements relating to earnings per

share, interim reporting and segmental

reporting are omitted.

simplifies methods of recognition and •

measurement; for example, goodwill is

amortised over ten years, research and

development costs are always expensed

and there is no classification of available-

for-sale financial assets.

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kaplanpublishing 155

Where the IFRS for SMEs does not

specifically address a transaction, event, or

condition, an SME is required to look to the

requirements and guidance elsewhere in the

IASB Standard for SMEs dealing with similar

and related issues.

Failing that, the SME is required to adopt

an accounting policy which results in

relevant and reliable information; in doing

so, it may (but is not required to) look to the

requirements and guidance in IFRS dealing

with similar and related issues.

The topics within this chapter could be

examined as part of a topical or current issue

within section B of the exam.

Within EN-gage Complete Text Chapter 21,

attempt TYU 1 SME’s.

Exam focus

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157

Adoption of IFRS

In this chapter

IFRS 1 First time adoption of IFRS.•

Implications of adoption of IFRS.•

Harmonisation of IFRS.•

chapter

Chapter 17

Adoption of IFRS

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IFRS 1 first time adoption of

IFRS

This standard sets out the procedures to be

followed in adopting IFRS for the first time.

The date of transition is the beginning

of the earliest period for which an entity

presents full comparative information under

IFRS in its first IFRS financial statements

Example

If an entity adopts IFRS for the first time in

its 31 December 2007 financial statements

and presents one year of comparative

information, the transition date will be 1

January 2006.

Adoption of IFRS

• Theentityshouldusethesame

accounting policies for all the periods

presented; these policies should

be based solely on IFRS in force at the

reporting date.

• Amajorproblemforentitiespreparing

for the changeover is that IFRS

themselves keep changing, although

the IASB have said there will be no more

standards to adopt until 2009.

• Entitieswillhavetocollectinformation

enabling them to prepare statements

under previous GAAP, current IFRS

and any proposed new standards or

amendments.

• IFRS1statesthattheopeningIFRS

statement of financial position must:

recognise all assets and liabilities –

required by IFRS

not recognise assets and liabilities –

not permitted by IFRS

reclassify all assets, liabilities and –

equity components in accordance

with IFRS

Definition

Chapter 17

kaplanpublishing 159

measure all assets and liabilities in –

accordance with IFRS.

Disclosures

• Entitiesmustexplainhowthetransition

to IFRS affects their reported financial

performance, financial position and cash

flows. Two main disclosures are required,

which reconcile equity and profits.

– The entity’s equity as reported under

previous GAAP must be reconciled

to the equity reported under IFRS at

two dates:

  • thedateoftransition.Thisisthe

opening reporting date

  • thelastreportingprepared

under previous GAAP.

– The last annual profit reported under

previous GAAP must be reconciled

to the same year’s profit prepared

under IFRS.

• Anymaterialdifferencesbetweenthe

previous GAAP and the IFRS cash flows

must also be explained.

IFRS 1 allows exemptions for certain items

where it is considered the cost of complying

would outweigh the benefit. Examples are:

• Previousbusinesscombinationsdo

not have to be restated (e.g. if merger

accounting had been applied which is

not allowed under IFRS).

• Pastcurrencytranslationreservesdonot

have to be shown separately from

retained earnings.

• Convertibledebtthathasbeenrepaid

does not have to be split into debt and

equity component.

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Implications of adoption of

IFRS

The transition to IFRS requires careful and

timely planning. There are a number of

questions that must be asked:

(a) Is there knowledge of IFRS within

the entity?

(b) Are there any agreements (such as

bank covenants) that are dependent on

local GAAP?

information systems?

(d) Which IFRSs will affect the entity?

(e) Is this an opportunity to improve the

accounting systems?

Oncetheinitialevaluationofthecurrent

position has been made, the entity can

determine the nature of any assistance

required.

Other considerations

• Willthechangeaffectdebtcovenants

and other legal contracts?

• Isthereanyaffectonperformance

related pay?

• Anychangesinreportingshouldbe

communicated to analysts

Harmonisation of IFRS

There are a number of reasons why the

harmonisation of accounting standards would

be beneficial. Businesses operate on a

global scale and investors make investment

decisions on a worldwide basis. There is

thus a need for financial information to

be presented on a consistent basis. The

advantages are as follows.

1 Multi-national entities

Multi-national entities would benefit from

closer harmonisation for the following

reasons.

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• Accesstointernationalfinancewould

be easier as financial information is

more understandable if it is prepared on

a consistent basis.

• Inabusinessthatoperatesinseveral

countries, the preparation of financial

information would be easier as it would

all be prepared on the same basis.

• Therewouldbegreaterefficiencyin

accounting departments.

• Consolidationoffinancialstatements

would be easier.

2 Investors

If investors wish to make decisions based

on the worldwide availability of investments,

then better comparisons between entities are

required. Harmonisation assists this process,

as financial information would be consistent

between different entities from different

regions.

3 International economic groupings

International economic groupings, e.g. the

EU, could work more effectively if there were

international harmonisation of accounting

practices. Part of the function of international

economic groupings is to make cross-border

trade easier. Similar accounting regulations

would improve access to capital markets and

therefore help this process.

IASB relationship with national standard

setters

The IASB has issued a draft memorandum

that sets out how national and regional

standards setters and the IASB should work

together towards a single set of high quality,

understandable and enforceable global

accounting standards. The draft proposes

that national and regional standard setters

should:

• takeprimeresponsibilityforidentifying

and dealing with domestic regulatory

barriers to adopting or converging with

IFRS

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Adoption of IFRS Chapter 17

• encouragenationstoparticipatein

international convergence efforts in

their own regulatory field where

this would facilitate financial reporting

convergence.

The IASB should:

• ensureitmakesrelevantinformation

available so that other standard setters

can be fully informed of the IASB’s

activities and future plans

• maintainanuptodatedatabaseof

technical issues reported by other

standard setters

• providesufficienttimetoallowother

standard setters to prepare additional

material that would be required to place

the IASB consultative documents in the

national context to obtain input from local

constituents.

Recent developments

The harmonisation process has gathered

pace in the last few years. From 2005 all

European listed entities were required

to adopt IFRS in their group financial

statements. Many other countries decided to

follow a similar process and there are many

countries who have now adopted IFRS or

are in the process of doing so.

Many national standard setters are

committed to a framework of accounting

standards based on IFRS.

Convergence with US GAAP

InOctober2002,theIASBandtheUSFASB

announced the issuance of a memorandum

of understanding (“Norwalk Agreement”),

marking a step toward formalising their

commitment to the convergence of U.S. and

international accounting standards. This

agreement was updated in February 2006.

ACCA Paper P2 (INT) Corporate Reporting Pocket notes - Kaplan 2010

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